Saturday 14 December 2002 19.11 EST
First published on Saturday 14 December 2002 19.11 EST

Ryanair, the most profitable airline in Europe, is hitting serious turbulence. Its heady success could be checked by a bitter cocktail of high level regulatory probes and damaging rulings.

Most seriously, the no-frills operator is facing questions from the European Commission about the incentives it received to fly to Charleroi airport in Belgium, and whether they constitute illegal state aid.

The EC investigation, first revealed in The Observer 12 months ago, was last week given 'official' status and could be extended to examine Ryanair's arrangements with a host of other airports across Europe.

The Dublin-based airline suffered a further damaging blow last week when the European Union announced that airlines will have to compensate passengers who are delayed, stranded or 'bumped off' an overbooked flight. Ryanair has come under a barrage of criticism for its handling of customer complaints.

In a final worrying development, the company faces escalating landing charges from the UK's National Air Traffic Control Service. Ryanair is considering suing the British Government over its bail-out of the cash-strapped service, which allowed Nats to raise prices higher than previously agreed.

Ryanair argues the new pricing framework is anti-competitive because Nats is part-owned by a consortium of six airlines that could benefit from any landing-fee hike. But one carrier, part of the Airline Group consortium, ridiculed the possibility of any potential Ryanair legal action succeeding because Nats's finances are so delicate that the service will not make money for the foreseeable future.

But first, the Charleroi headache. Ryanair, which insists there is nothing improper about its deal with the Belgian airport, is facing an investigation which could last up to 18 months. One industry insider said that if the Commission found Ryanair guilty it could be fined up to €10m - equivalent to 3.6 per cent of net profits. However, an unfavourable judgment could cost Ryanair a whole lot more.

It might, for example, be forced to hand back the benefits of all favours deemed illegal. Greece's ailing flag carrier, Olympic Airways, is presently appealing against an EU order to pay back £125m in subsidies it has received since 1998. The real nightmare for Ryanair though is that a harsh verdict could, theoretically at least, invalidate its business model.

After all, Michael O'Leary, Ryanair chief executive, says the Irish airline has got 'better deals at other airports'. Many Ryanair destinations - including the Italian airports at Treviso, Rome and Pisa, France's Carcassone and Barcelona in Spain - are state-owned and may have offered great deals to entice the airline to bring its passengers to their regions. Officials at Hahn airport, near Frankfurt, have calculated that a local job is created for every 1,000 Ryanair tourists.

Loyola de Palacio, the EC transport commissioner, said her investigation would centre on special reduced landing fees granted to Ryanair, and a package of other concessions making it cheaper for the airline to recruit, train and pay staff locally, to open offices at the airport and to lay on new routes. Of particular interest, too, will be any hotel and subsistence subsidies for Ryanair staff.

Last year, this newspaper published confidential details of the inducements offered to Ryanair by Charleroi airport, which is part-owned by the Walloon regional authority. These included:

· €160,000 (£103,000) for each of the first 12 routes Ryanair opens from Charleroi. Since the contract took effect in April 2001, it has launched flights to several new destinations

· €768,000 (£493,000) to subsidise recruitment and training of pilots and cabin crew

· cheap landing tax of €1 (64p) per passenger, rising to only €1.13 (72p) in 2006 and €1.30 (83p) in 2010

· free offices

· up to €250,000 (£160,000) towards Ryanair's hotel and subsistence costs while it set up its office at the airport.

Of course, it is highly unlikely that all, if any, of these benefits will get the thumbs-down from the EC. Another consolation for Ryanair is the thought that curtailments would be a blow to its rivals too.

'Clearly, Ryanair gets incentives,' said one City analyst. 'But all airlines get incentives. It's a fact of business. The one good thing about this is that, if nothing else, we'll get some clarity about what airlines can and can't do.'

Whatever happens in Brussels, analysts are agreed that Ryanair is facing a challenging period. Its most recent half-year net profits were up 71 per cent to £108m, its revenues up 35 per cent to £330m. These are staggering figures in an industry where widespread redundancies and even bankruptcies have been the recent norm. Ryanair is probably the most profitable and valuable airline in Europe, even though British Airways, for instance, has a fleet 10 times the size of its 44 planes.

The no-frills landscape, though, is changing. As they become more established, secondary airports are widely expected to start demanding better deals. A recent McKinsey analysis warned that no-frills companies might double their European market share to 14 per cent in the next five years, but were less likely to grow much beyond that.

But the Irish carrier is buoyant. It has already set itself a target of doubling passenger numbers from 15m this year to 30m in the next five years with the aid of a huge expansion of its Boeing 737 aircraft fleet and route network.

O'Leary has said he believes Ryanair could be flying between 70m and 80m passengers a year by 2010'provided we do not do anything stupid'. But with its business model under scrutiny in Europe, Ryanair's shareholders will hope it is not overstretching itself.